Yahoo’s Dot-Com Premium for Tumblr Tests Mayer: Real M&A

The Yahoo! Inc. (YHOO) chief executive officer yesterday announced the company will acquire blogging network Tumblr Inc., part of a plan to restore the Web portal to its heyday as an Internet darling. With $13 million in sales last year, Tumblr’s $1.1 billion price tag represents the richest valuation for a dot-com company since 2000, according to data compiled by Bloomberg on deals for which revenue figures are available.

“Using any conventional metrics, the price is absurd,” said Scott Rostan, a former mergers and acquisitions analyst whose New York-based Training The Street teaches new hires at investment banks about deals. “That’s because this isn’t about the valuation per se. It’s about future value, it’s about potential, and therefore it’s going to go on Yahoo’s team and Mayer’s shoulders and boil down to execution.”

Mayer will have to boost Tumblr’s revenue more than sevenfold to about $100 million to bring the New York-based company’s valuation more in line with publicly traded Web peers such as LinkedIn Corp. (LNKD) and Zillow Inc. (Z), data compiled by Bloomberg show. While such growth wouldn’t be unprecedented among social-media companies, there’s no guarantee that Tumblr will maintain its popularity or that the deal is the best use of Yahoo’s cash, Pivotal Research Group said.

‘Exceptional Company’

“You only do an acquisition of this size and scale if you find an exceptional company, and Tumblr is that,” Mayer said on a conference call yesterday. “The growth in users has been impressive. It’s been among the strongest of all the major technology sites.”

Tumblr, founded by 26-year-old David Karp, offers a free service for publishing blogs that can be accessed on the Web and on mobile devices, as well as tools for sharing photos and videos across social networks. Mayer is betting that her purchase of the site will help transform Yahoo into a hip destination for users and advertisers in the era of social networking.

By adding Tumblr, Yahoo is expected to expand its audience by 50 percent, the company said in its statement announcing the deal.

High Price

Tumblr had $13 million of revenue last year, according to PrivCo, which provides data on private companies. That means Yahoo is paying 85 times sales, the biggest multiple for an Internet company since 2000, the same year Yahoo’s stock peaked at $118.75 amid the tech bubble, data compiled by Bloomberg show. Yahoo shares were valued at less than a quarter of that amount yesterday at $26.58.

Today, Yahoo shares climbed 1.6 percent to $27.

“Clearly it’s expensive,” Brian Wieser, a New York-based analyst at Pivotal Research, said about Tumblr in a phone interview. “It’s not clear that the site will maintain its traction with users. It remains to be seen whether they can bring more advertisers. It’s just not clear yet whether this is the best way for Yahoo to spend” about $1 billion.

Yahoo’s paying $9.40 for each of the 117 million worldwide visitors that ComScore Inc. estimates visited the blog last month. Facebook Inc. (FB) paid about $45 per active Instagram user when it acquired the photo-sharing phone application last year. Facebook CEO Mark Zuckerberg said May 1 that Instagram now has more than 100 million active users each month, up from 22 million when it agreed to buy the app.

Tumblr’s valuation would shrink to 11 times sales if its revenue climbed to about $100 million -- an amount the company is targeting, according to a Forbes report earlier this year. U.S. social-media and Internet-based services companies with market values larger than $1 billion have a median price-sales ratio of 6.4, data compiled by Bloomberg show.

Not Ridiculous

The two most expensive stocks in the industry are resume-sharing platform LinkedIn and real-estate listings site Zillow, which fetch multiples of 18 and 14, respectively, the data show.

In that sense, “it’s not completely ridiculous,” John Blackledge, a New York-based analyst at Cowen Group Inc., said in a phone interview. “It’s expensive, but for a hip, fast-growing social-blogging platform, it’s something that seems reasonable to us.”

The deal also doesn’t put much of a dent in Yahoo’s war chest, Blackledge said. Yahoo had $5.4 billion of cash and equivalents as of March 31 and also owns about 20 percent of Alibaba Group Holding Ltd., China’s largest e-commerce company. Alibaba is expected to soon hold an initial public offering that would give Yahoo an even bigger cash stockpile, he said.

Deal Leeway

“Luckily for Yahoo, the value of its stock is very much driven by the Asian assets right now,” Ben Schachter, a New York-based analyst for Macquarie Group Ltd., said in a phone interview. “Investors will give them some leeway in terms of experimenting and trying to regain some momentum.”

When Mayer was considering how much to pay for Tumblr, her decision was probably less guided by concerns over valuation than it was by her competition, Schachter said.

Tumblr had contacted bigger technology companies seeking to be bought, or form a partnership, prior to closing the deal with Yahoo, according to people with knowledge of the matter, who asked not to be identified because the overtures were private.

“With a lot of these Internet deals, the price really comes down to how much you need to pay to keep it away from somebody else,” he said. “It’s very difficult to give any justification to $1 billion on any of the metrics that are available today. It’s a lot of guess work and hope at this point.”